Management Discussion and Analysis - olamgroup.com€¦ · Management Discussion and Analysis 4...

Management

Discussion

and Analysis August 14, 2019

Results for the period

ended June 30, 2019

Crown Flour Mills, Nigeria

Management Discussion and Analysis

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MANAGEMENT DISCUSSION AND ANALYSIS

Results for the Second Quarter (“Q2 2019”) and Six Months ended June 30, 2019 (“H1 2019”)

Contents

Key Highlights…………………………………………………………………..3 Financial Performance .............................................................................................................. 3 Adoption of SFRS(I) 16 ............................................................................................................. 4 Financing .................................................................................................................................... 5 Strategic Plan Update ............................................................................................................... 6 Outlook and Prospects ............................................................................................................. 7

Summary of Financial and Operating Results ........................................ 8 Profit and Loss Analysis........................................................................................................... 8

Balance Sheet Analysis .......................................................................................................... 11

Debt, Liquidity and Gearing.................................................................................................... 12

Cash Flow Analysis ................................................................................................................. 13

Segmental Review and Analysis ............................................................ 14

Edible Nuts and Spices ........................................................................................................... 16

Confectionery and Beverage Ingredients ............................................................................. 17

Food Staples and Packaged Foods ....................................................................................... 18

Industrial Raw Materials, Infrastructure and Logistics ....................................................... 19

Commodity Financial Services .............................................................................................. 19

Annexure ................................................................................................. 20

SGXNET Financial Statements and MD&A Reconciliation .................................................. 20 Business Model and Strategy ................................................................................................ 20

Business Segmentation and Reporting ................................................................................ 23

Key Definitions ........................................................................................................................ 25

This Management Discussion and Analysis (MD&A) should be read and understood only in conjunction with the full text of Olam International Limited’s Financial Statements for the Second Quarter and Six Months ended June 30, 2019 lodged on SGXNET on August 14, 2019. www.olamgroup.com/investors.html [email protected]

Olam onions, USA


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Key Highlights

Financial Performance

S$ million H1 2019 H1 2018 % Change Q2 2019 Q2 2018 % Change

Volume ('000 MT) 19,100.2 13,606.6 40.4 10,639.6 6,641.4 60.2

Revenue 15,943.9 13,724.6 16.2 8,596.0 7,429.2 15.7

Net loss in fair value of

biological assets(4.0) (9.8) (59.3) (3.0) (5.7) (48.2)

EBITDA 771.5 676.0 14.1 351.2 307.9 14.1

Depreciation &

Amortisation(249.5) (188.7) 32.2 (124.8) (93.0) 34.2

Net Finance costs (264.9) (201.7) 31.3 (161.2) (114.4) 40.9

Taxation (31.7) (47.1) (32.7) (10.8) (17.1) (36.8)

Exceptional items (17.7) (2.1) 742.9 (5.5) 2.6 n.m.

PAT 207.7 236.4 (12.1) 48.9 86.0 (43.2)

PATMI 230.3 251.9 (8.5) 61.5 94.0 (34.5)

Operational PATMI 248.0 254.0 (2.4) 67.0 91.4 (26.7)

Profit After Tax and Minority Interests (PATMI) declined 8.5% to S$230.3 million in

H1 2019 from S$251.9 million in H1 2018 on higher depreciation and amortisation, net

finance costs and exceptional losses, despite growth in EBITDA. Excluding the impact of

SFRS(I) 16 (see additional notes on page 4), PATMI would have declined by 3.4% to

S$243.3 million.

Operational PATMI (PATMI excluding exceptional items) was marginally lower by 2.4%

at S$248.0 million compared with S$254.0 million in H1 2018 due to higher depreciation

and net finance charges. Excluding the impact of SFRS(I) 16, Operational PATMI would

have been grown by 2.8% to S$261.0 million.

Sales volume rose by 40.4% in H1 2019 mainly on account of the increase in Grains

trading volumes.

EBITDA grew by 14.1% to S$771.5 million in H1 2019 (H1 2018: S$676.0 million) mainly

due to improved EBITDA from all segments except Industrial Raw Materials, Infrastructure

and Logistics. The adoption of SFRS(I) 16 from January 1, 2019 had a positive impact of

S$49.5 million during the period.

Depreciation and amortisation charges were higher by 32.2% at S$249.5 million (H1

2018: S$188.7 million) mainly due to a S$47.4 million increase from a larger fixed capital

base on right-of-use assets following the adoption of SFRS(I) 16 from January 1, 2019.

Net finance costs increased by 31.3% to S$264.9 million (H1 2018: S$201.7 million)

due to the impact of higher interest rates and the increase in finance charges of S$15.0

million arising from the adoption of SFRS(I) 16 from January 1, 2019. The increase was

partly offset by higher finance income.


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Gross Capex of S$365.7 million (H1 2018: S$439.4 million) was incurred during H1 2019

for investments, including the acquisition of 85.0% in BT Cocoa, as well as ongoing Capex

commitments during this period. Net Capex after disposals and divestments was

S$355.0 million in H1 2019 compared with S$170.5 million in H1 2018.

Free Cash Flow to Equity (FCFE) was positive at S$864.2 million in H1 2019 (H1

2018: -S$167.0 million).

Net gearing improved to 1.28 times as at June 30, 2019 compared with 1.46 times as

at June 30, 2018. Excluding the impact of SFRS(I) 16, net gearing would have been at

1.19 times.

The Board of Directors has declared an interim dividend of 3.5 cents per share for H1

2019 (H1 2018: 3.5 cents).

Adoption of SFRS(I) 16

SFRS(I) 16 is effective from January 1, 2019, and the Group has adopted modified retrospective

approach which does not require any restatement of prior period financial statements.

Adoption of this new standard has resulted in most leases being recognised on balance sheet,

with exemption of short-term and low value assets’ leases. Under this new standard, at the

commencement of a lease, a “right-of-use asset” and a “lease liability” for lease payments are

recognised on the balance sheet. Total borrowings or net debt will increase to the extent of the

lease liability. This new standard also requires separate recognition of finance charge on the

lease liability and depreciation on the right-of-use asset in the profit and loss account.

As at January 1, 2019, the adoption of SFRS(I) 16 resulted in the following key effects to the

balance sheet of the Group:

S$ million 1-Jan-19

Assets

Property, plant and equipment (76.8)

Right-of-use assets 706.8

Other current assets (24.2)

Total Assets 605.8

Liabilities

Lease liabilities 699.9

Finance lease liabilities (94.1)

Total Liabilities 605.8


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The right-of-use assets and lease liabilities that were recognised on January 1, 2019 resulted in

an increase in EBITDA by S$49.5 million in H1 2019. This also raised depreciation and finance

charges by S$47.4 million and S$15.0 million respectively in H1 2019. PATMI and Operational

PATMI were lower by S$13.0 million for the first-half. The Profit and Loss items with and without

the impact of SFRS(I) 16 are summarised in the table that follows:

S$ million

Profit & Loss Statement Reported SFRS(I) 16

Impact

Excluding

SFRS(I) 16Reported

SFRS(I) 16

Impact

Excluding

SFRS(I) 16

EBITDA 771.5 49.5 722.0 351.2 24.9 326.3

Depreciation & Amortisation (249.5) (47.4) (202.1) (124.8) (23.8) (101.0)

Net Finance costs (264.9) (15.0) (249.9) (161.2) (7.5) (153.7)

PATMI 230.3 (13.0) 243.3 61.5 (6.6) 68.1

Operational PATMI 248.0 (13.0) 261.0 67.0 (6.6) 73.6

H1 2019 Q2 2019

Financing

In April 2019, Olam and its wholly owned subsidiary, Olam Treasury (OTPL) secured the

world’s first “Digital Loan”, a three-year digital-linked revolving credit facility aggregating

US$350.0 million. The pricing of the facility is linked to Olam’s digital maturity score, which

is determined by the Boston Consulting Group using their proprietary “Digital Acceleration

Index” methodology that assesses Olam across four digital building blocks: (1) business

strategy driven by digital; (2) digitising the core; (3) new digital growth; and (4) enablers.

Olam and the participating banks have agreed on annual improvement targets over the

course of the facility which, if achieved, would trigger a reduction in the interest rate.

In May 2019, Olam’s wholly-owned subsidiary Olam Americas Inc. successfully priced a

US$120.0 million issuance of five-year fixed rate notes via a private placement to nine

investors at a fixed coupon of 3.89% for five years.

In July 2019, Olam’s wholly owned subsidiary, Olam Holdings B.V. secured a revolving

credit facility aggregating US$375.0 million. The facility has a 364-day tenor with an option

to extend for a further 364 days.


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Strategic Plan Update

On January 25, 2019, we announced our 2019-2024 Strategic Plan that capitalises on key

trends shaping the sector. Driven by consumers and advances in technology, these trends

include increasing demand for healthier foods, traceable and sustainable sourcing, e-commerce

and the rise of “purpose” brands. Olam plans to invest US$3.5 billion (including maintenance

Capex) to strengthen businesses with high growth potential, while releasing US$1.6 billion by

responsibly divesting certain businesses and assets lying outside the strategic priorities over the

course of this plan. Read the Annexure “Business Model and Strategy” for more details.

Further to the announcement of our new Strategic Plan, we have appointed Credit Suisse

(Singapore) Limited and Rothschild & Co Singapore Limited as Joint Financial Advisors to

explore various options to maximise long term value for shareholders. This exercise is expected

to be completed by the end of 2019.

During H1 2019, the Company closed the Sugar, Rubber and Fertiliser trading desks, the

Fundamental Fund and the Wood Products business in Latin America. It also completed the

following transactions:

Indirect wholly-owned subsidiary Queensland Cotton Corporation Pty Ltd (QCC) disposed

of its entire 51.0% shareholding in Collymongle Ginning Pty Ltd, a company incorporated

in Australia, to PJ & PM Harris Pty Ltd (Harris) following an exercise of option, for a total

cash consideration of A$4.08 million. (QCC had in 2014 sold 49.0% stake in CGPL to

Harris, reducing its shareholding from 100.0% to 51.0%.)

Wholly owned subsidiary Olam Argentina S.A. disposed of its entire 100.0% equity

interest in Olam Alimentos S.A., which was incorporated in Argentina with principal activity

in peanut shelling and blanching, to Adecoagro, for a cash consideration of US$10.0

million. This is in line with the new Strategic Plan of divesting select businesses and

redeploying capital into proven businesses which have performed consistently and have

market leading positions, such as the peanut shelling, blanching and ingredients business

in the US.

Olam acquired 85.0% equity interest in YTS Holdings Pte Ltd, which owns 100.0% of

Indonesia’s largest cocoa processor PT Bumitangerang Mesindotama (BT Cocoa), from

its founding members, Piter Jasman and family, for a total cash consideration of US$90.0

million. The transaction is part of the new Strategic Plan to grow its cocoa ingredients

business by expanding its platform in Asia and enhancing its product offering in the

region.

Olam completed the acquisition of 60.0% interest in Cotonchad SN, the state-owned

company with exclusive rights to procure, process and sell Chadian cotton and by-

products, for US$16.0 million.


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Olam, through wholly owned subsidiary Outspan Cyprus Limited, acquired the remaining

minority shareholding of 6.98% in Milky Projects Limited, which directly holds equity in

Russian Dairy Company (“Rusmolco”), from its founding shareholder. Following the

acquisition, Rusmolco becomes a wholly-owned subsidiary of Olam.

In April 2019, Olam made a binding offer to acquire 100.0% of Dangote Flour Mills (DFM), a

leading flour and pasta manufacturer in Nigeria, for an enterprise value of NGN 130.0 billion

(approximately US$361.0 million). On August 5, 2019, following the adjustment for the net

working capital and net debt of DFM as at 31 March 2019, Olam submitted an addendum to the

offer with a revised consideration of NGN 120.0 billion (approximately US$331.4 million) for all

outstanding shares in DFM that it does not currently own. The proposed acquisition of DFM

supports the strategy of the Grain and Animal Feed business to expand its wheat milling

capacity in high-growth markets, such as Nigeria. Olam and DFM combined would provide

enhanced manufacturing capacity and create synergies with the Group’s existing business. The

transaction is subject to, amongst others, the approval of DFM’s shareholders, regulatory

approvals, the sanction of the Federal High Court of Nigeria, as well as the absence of a

material adverse change in DFM. If approved, the transaction is expected to be completed

during Q4 2019.

Outlook and Prospects

Even as political and economic uncertainties are likely to affect global trading conditions in

2019, Olam believes its diversified and well-balanced portfolio provides a resilient platform to

navigate the challenges in both the global economy and commodity markets.

Olam is executing on the four strategic pathways for growth as set out in the 2019-2024

Strategic Plan. It will strengthen, streamline and focus its business portfolio, drive margin

improvement by enhancing cost and capital efficiency, generate additional revenue streams by

offering differentiated products and services, and explore partnerships and investments in select

new engines for growth.


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Summary of Financial and Operating Results

Profit and Loss Analysis

S$ million H1 2019 H1 2018 % Change Q2 2019 Q2 2018 % Change

Volume ('000 MT) 19,100.2 13,606.6 40.4 10,639.6 6,641.4 60.2

Revenue 15,943.9 13,724.6 16.2 8,596.0 7,429.2 15.7

Other income^ 20.3 12.7 59.8 10.4 5.6 85.7

Cost of sales (14,479.9) (12,293.9) 17.8 (7,924.9) (6,659.9) 19.0

Selling, general and administrative

expenses^(668.0) (640.6) 4.3 (342.3) (333.8) 2.5

Other operating expenses (63.9) (144.3) (55.7) (2.9) (142.5) (98.0)

Net loss in fair value of biological

assets(4.0) (9.8) (59.3) (3.0) (5.7) (48.2)

Share of results from jointly

controlled entities and associates23.1 27.3 (15.4) 17.9 15.0 19.3

EBITDA^ 771.5 676.0 14.1 351.2 307.9 14.1

EBITDA % 4.8% 4.9% 4.1% 4.1%

Depreciation & amortisation (249.5) (188.7) 32.2 (124.8) (93.0) 34.2

EBIT^ 522.0 487.3 7.1 226.4 214.9 5.4

Exceptional items (17.7) (2.1) 742.9 (5.5) 2.6 n.m.

Net Finance costs (264.9) (201.7) 31.3 (161.2) (114.4) 40.9

PBT^ 239.4 283.5 (15.6) 59.7 103.1 (42.1)

Taxation^ (31.7) (47.1) (32.7) (10.8) (17.1) (36.8)

PAT 207.7 236.4 (12.1) 48.9 86.0 (43.2)

PAT % 1.3% 1.7% 0.6% 1.2%

Non-controlling interests (22.6) (15.5) 46.0 (12.6) (8.0) 58.8

PATMI 230.3 251.9 (8.5) 61.5 94.0 (34.5)

PATMI % 1.4% 1.8% 0.7% 1.3%

Operational PATMI 248.0 254.0 (2.4) 67.0 91.4 (26.7)

Operational PATMI % 1.6% 1.9% 0.8% 1.2%

^Excluding exceptional items

Sales Volume

Sales volume grew 40.4% mainly due to higher trading volumes in Grains during H1 2019.

Revenue

Revenue growth on the other hand was lower at 16.2%, as the increased trading volumes from

Grains have a lower selling price than that of other products in the portfolio.

Other Income

Other income was higher at S$20.3 million (H1 2018: S$12.7 million).


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Cost of Sales

The change in cost of sales normally follows the corresponding change in revenue for a given

period. In H1 2019, cost of sales increased by 17.8%, largely in tandem with the growth in

revenue.

Selling, General & Administrative Expenses

Selling, General & Administrative Expenses increased by 4.3% to S$668.0 million in H1 2019

(H1 2018: S$640.6 million) on account of investments in new corporate growth initiatives, such

as digitalisation, co-manufacturing for food service, e-commerce and sustainability-based

solutions, including AtSource.

Other Operating Expenses

Other operating expenses decreased from S$144.3 million in H1 2018 to S$63.9 million in H1

2019 due to lower unrealised foreign exchange losses recorded on the devaluation of local

currencies against the US dollar compared to the prior corresponding period.

Net Changes in Fair Value of Biological Assets

There was a reduction in net loss from fair valuation of upstream dairy assets in Uruguay and

Russia from S$9.8 million in H1 2018 to S$4.0 million in H1 2019.

Share of Results from Jointly Controlled Entities and Associates

The share of results from jointly controlled entities and associates declined from S$27.3 million

in H1 2018 to S$23.1 million in H1 2019 mainly due to lower contribution from our investment in

Long Son.

EBITDA

EBITDA increased by 14.1% to S$771.5 million in H1 2019 mainly due to improved performance

from all segments except Industrial Raw Materials, Infrastructure and Logistics. The adoption of

SFRS(I) 16 from January 1, 2019 had a positive impact of S$49.5 million.

Depreciation and Amortisation

Depreciation and amortisation expenses increased 32.2% to S$249.5 million (H1 2018: S$188.7

million) mainly due to the S$47.4 million increase from a larger fixed capital base on right-of-use

assets following the adoption of SFRS(I) 16 from January 1, 2019.

Finance Costs

Net finance costs increased by 31.3% to S$264.9 million (H1 2018: S$201.7 million) due to the

impact of higher interest rates and the increase in finance charges of S$15.0 million arising from

the adoption of SFRS(I) 16 from January 1, 2019. The increase was partly offset by higher

finance income.


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Taxation

Tax expenses were lower from S$47.1 million in the prior first-half to S$31.7 million in H1 2019

primarily due to the change in the earnings composition in terms of business mix and

geographical spread.

Non-controlling Interest

Non-controlling interest, which comprises mainly the minority share of results from Olam Palm

Gabon (OPG), Olam Rubber Gabon (ORG) and Caraway (Packaged Foods), was a loss of

S$22.6 million in H1 2019 (H1 2018: -S$15.5 million) arising from higher period costs incurred

by OPG and ORG on partially yielding plantations.

Exceptional Items

The H1 2019 results included a net exceptional loss of S$17.7 million (H1 2018: -S$2.1 million)

due to one-off costs incurred during the first-half following the closure of the Sugar, Rubber and

Fertiliser trading desks, Fundamental Fund, Wood Products business in Latin America, as well

as the sale of the peanut shelling and farming business in Argentina and the remaining stake in

Collymongle gin in Australia.

S$ million H1 2019 H1 2018 Q2 2019 Q2 2018

Profit on sale of land in US - 13.7 - 0.1

Profit on sale of Subsidiary 0.6 5.7 - 0.1

Sale of Café Enrista brand - 2.6 - 2.6

Loss on sale of JV/Associate (1.1) (24.1) - (0.2)

Exit/Closure costs (17.2) - (5.5) -

Exceptional Items (17.7) (2.1) (5.5) 2.6

PATMI

PATMI declined 8.5% to S$230.3 million in H1 2019 compared with S$251.9 million in H1 2018

mainly due to higher depreciation and amortisation, net finance costs and exceptional losses,

offsetting the growth in EBITDA. The result includes a net negative impact of S$13.0 million on

the adoption of SFRS(I) 16.

Operational PATMI

Operational PATMI (PATMI excluding exceptional items) was marginally lower by 2.4% at

S$248.0 million in H1 2019 (H1 2018: S$254.0 million), which includes the net negative impact

of S$13.0 million on the adoption of SFRS(I) 16.


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Balance Sheet Analysis1

S$ million 30-Jun-2019 31-Dec-2018

Changevs Dec 18 30-Jun-2018

Changevs Jun 18

Uses of Capital

Fixed Capital 8,337.8 8,349.3 (11.5) 8,388.5 (50.7)

Right-of-use assets 656.4 - 656.4 - 656.4

Working Capital 5,757.2 6,376.4 (619.2) 7,646.4 (1,889.2)

Cash 3,697.2 2,480.4 1,216.8 2,426.3 1,270.9

Others 280.9 526.2 (245.3) 559.9 (279.0)

Total 18,729.5 17,732.3 997.2 19,021.1 (291.6)

Sources of Capital

Equity & Reserves 6,703.7 6,652.9 50.8 6,801.1 (97.4)

Non-controlling interests 126.7 138.7 (12.0) 163.2 (36.5)

Short term debt 5,043.8 4,766.4 277.4 4,130.3 913.5

Long term debt 6,565.9 6,407.7 158.2 8,141.4 (1,575.5)

Short term lease liabilities 81.5 10.7 70.8 10.0 71.5

Long term lease liabilities 581.4 83.4 498.0 78.5 502.9

Fair value reserve (373.5) (327.5) (46.0) (303.4) (70.1)

Total 18,729.5 17,732.3 997.2 19,021.1 (291.6)

Others are deferred tax assets and liabilities, other non-current assets, derivative financial instruments (assets and liabilities) and provision for taxation.

The Group’s total assets2 as at June 30, 2019 were S$18.7 billion, comprising S$8.3 billion of

fixed capital, S$656.4 million of right-of-use assets3, S$5.8 billion of working capital and S$3.7

billion of cash. The right-of-use assets were largely made up of land and building assets, while

plant and machinery was a small component.

The total assets were funded by S$6.7 billion of equity, S$5.0 billion of short term debt, S$6.6

billion of long term debt, as well as short term and long term lease liabilities of S$81.5 million

and S$581.4 million respectively, which came about with the adoption of SFRS(I) 16.

Compared with December 31, 2018, the overall balance sheet as at June 30, 2019 increased by

S$997.2 million mainly on account of the increase in the cash position and the adoption of

SFRS(I) 16.

However, compared with June 30, 2018, the overall balance sheet shrank by S$291.6 million as

the significant decline in working capital offset the increase in fixed assets caused by the

addition of the right-of-use assets.

1 The Company’s balance sheet includes reserves created on account of the restructuring of the US

business earlier held by Queensland Cotton Australia, which have been reversed at the Group level

(to be read in conjunction with Page 3 of SGXNET Financial Statements for H1 2019).

2 Total assets are net of trade payables and accruals, derivative financial instruments (current liabilities),

provision for taxation, other current liabilities and deferred tax liabilities.

3 Please refer to page 15 of the SGXNET Financial Statements for further explanation.


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Working Capital

S$ million 30-Jun-2019 31-Dec-2018 Change 30-Jun-2018

Change

vs Jun 18

Stock 6,682.4 6,468.2 214.2 6,739.5 (57.1)

Advance to suppliers 875.3 805.5 69.8 789.8 85.5

Receivables 2,009.3 2,435.2 (425.9) 2,031.2 (21.9)

Trade creditors (4,465.2) (3,633.9) (831.3) (2,556.6) (1,908.6)

Others 655.4 301.4 354.0 642.5 12.9

Working Capital 5,757.2 6,376.4 (619.2) 7,646.4 (1,889.2)

Others include other current assets, changes to margin accounts with brokers and other current liabilities.

Compared with December 31, 2018, working capital decreased by S$619.2 million with the

change in product mix towards bulk trading volumes, improved access to supplier credit and the

reduction in receivables. This led to a reduction in overall working capital cycle from 76 days as

at December 31, 2018 to 61 days as at June 30, 2019.

Against June 30, 2018, working capital was reduced by S$1.9 billion with improved supplier

terms on enhanced bulk volumes, causing overall working capital cycle to shorten from 100 to

61 days.

Days 30-Jun-2019 31-Dec-2018

Change

vs Dec 18 30-Jun-2018

Change

vs Jun 18

Stock 84 84 - 99 (15)

Advance to suppliers 11 10 1 11 -

Receivables 22 29 (7) 27 (5)

Trade creditors (56) (47) (9) (37) (19)

Total cash cycle 61 76 (15) 100 (39)

Debt, Liquidity and Gearing

S$ million 30-Jun-2019 31-Dec-2018

Change

vs Dec 18 30-Jun-2018

Change

vs Jun 18

Gross debt 12,272.6 11,268.2 1,004.4 12,360.3 (87.7)

Less: Cash 3,697.2 2,480.4 1,216.8 2,426.3 1,270.9

Net debt 8,575.4 8,787.8 (212.4) 9,934.0 (1,358.6)

Less: Readily marketable inventory 5,037.9 4,754.1 283.8 5,816.2 (778.3)

Less: Secured receivables 1,762.8 2,103.5 (340.7) 1,595.3 167.5

Adjusted net debt 1,774.7 1,930.2 (155.5) 2,522.5 (747.8)

Equity (before FV adj reserves) 6,703.7 6,652.9 50.8 6,801.1 (97.4)

Net debt / Equity (Basic) 1.28 1.32 (0.04) 1.46 (0.18)

Net debt / Equity (without SFRS(I) 16) 1.19 1.32 (0.13) 1.46 (0.27)

Net debt / Equity (Adjusted) 0.26 0.29 (0.03) 0.37 (0.11)

Compared with June 30, 2018, despite the addition of S$574.4 million of lease liabilities on the

adoption of SFRS(I) 16, net debt as at June 30, 2019 was lower by S$1.4 billion on reduced

working capital. Net gearing improved from 1.46 to 1.28 times.


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Compared with December 31, 2018, net debt also decreased by S$212.4 million on similar

count. This resulted in reduced net gearing of 1.28 times as against 1.32 times as at December

31, 2018. In addition, if not for the impact of SFRS(I) 16 on liabilities, our net gearing would

have been at 1.19 times.

Of the S$6.7 billion inventory position, approximately 75.4% or S$5.0 billion were readily

marketable inventories (RMI) that were liquid, hedged and/or sold forward, operating as near-

cash assets on our balance sheet. In addition, approximately 87.7% of the S$2.0 billion in trade

receivables were secured. Typically, at any given point, about 75-85% of inventory is hedged

and/or sold forward and 60-70% of receivables are supported by letters of credit or documents

through banks. Adjusting for RMI and secured receivables, our net gearing would be 0.26 times,

reflecting the true indebtedness of our Company.

Compared with December 31, 2018 and June 30, 2018, cash balance as at June 30, 2019 was

higher at S$3.7 billion to take care of near-term repayment obligations on borrowings.

We maintained sufficient liquidity to meet our working capital and capital expenditure

requirements, with a total of S$19.3 billion in available liquidity as at June 30, 2019, including

unutilised bank lines of S$8.8 billion.

Cash Flow Analysis

S$ million H1 2019 H1 2018 YoY

Operating Cash flow (before Interest & Tax) 770.0 685.7 84.3

Changes in Working Capital 765.3 (388.1) 1,153.4

Net Operating Cash Flow 1,535.3 297.6 1,237.7

Tax paid (51.8) (90.5) 38.7

Capex/ Investments (355.0) (170.5) (184.5)

Free cash flow to firm (FCFF) 1,128.5 36.6 1,091.9

Net interest paid (264.3) (203.6) (60.7)

Free cash flow to equity (FCFE) 864.2 (167.0) 1,031.2

Net operating cash flow for H1 2019 increased significantly by S$1.2 billion to S$1.5 billion due

to lower deployment of working capital during the first-half. Net of Capex and divestments, Free

Cash Flow to Firm (FCFF) and FCFE improved to a positive S$1.1 billion (H1 2018: S$36.6

million) and S$864.2 million (H1 2018: -S$167.0 million) respectively.

We expect significant investments to be undertaken during the year, including our proposed

acquisition of DFM and more working capital to be deployed during the second half of 2019 as

we approach the peak of the procurement season for several of our leading commodities, such

as Cocoa and Coffee.

Management Discussion & Analysis

14

Segmental Review and Analysis

For Q2 2019 Segment

S$ million Q2 2019 Q2 2018 Q2 2019 Q2 2018 Q2 2019 Q2 2018 30-Jun-2019 31-Dec-2018 30-Jun-2018

Edible Nuts and Spices 420.2 428.7 1,074.4 1,183.4 99.5 100.9 4,127.9 3,609.9 4,090.5

Confectionery and Beverage Ingredients 412.2 437.5 1,520.6 1,684.8 106.6 117.1 4,416.0 4,935.1 4,763.3

Food Staples and Packaged Foods 9,218.3 5,172.8 4,697.5 3,299.4 93.8 66.9 4,391.9 4,577.9 5,035.2

Food Category 10,050.7 6,039.0 7,292.5 6,167.6 299.9 284.9 12,935.8 13,122.9 13,889.0

Industrial Raw Materials, Infrastructure

and Logistics588.9 602.4 1,303.5 1,261.6 46.3 27.9 1,494.6 1,571.7 1,933.8

Commodity Financial Services (CFS) N.A. N.A. - - 5.0 (4.9) 96.5 117.6 173.7

Non-Food Category 588.9 602.4 1,303.5 1,261.6 51.3 23.0 1,591.1 1,689.3 2,107.5

Total 10,639.6 6,641.4 8,596.0 7,429.2 351.2 307.9 14,526.9 14,812.2 15,996.5

Sales Volume ('000 MT) Revenue EBITDA Invested Capital (IC)

Notes: IC excludes: (a) Gabon Fertiliser Project (30-Jun-19: S$243.4 million, 31-Dec-18: S$245.4 million, 30-Jun-18: S$248.1 million), and (b) Long Term Investment (30-Jun-19: S$123.8 million, 31-Dec-18: S$135.8 million, 30-Jun-18: S$214.1 million)


15

For H1 2019 Segment

S$ million H1 2019 H1 2018 H1 2019 H1 2018 H1 2019 H1 2018 30-Jun-2019 31-Dec-2018 30-Jun-2018

Edible Nuts and Spices 790.4 774.3 2,036.5 2,057.9 255.6 236.7 4,127.9 3,609.9 4,090.5

Confectionery and Beverage Ingredients 867.1 933.7 3,215.5 3,554.7 240.2 178.3 4,416.0 4,935.1 4,763.3

Food Staples and Packaged Foods 16,291.6 10,818.2 8,205.0 5,947.1 176.0 167.3 4,391.9 4,577.9 5,035.2

Food Category 17,949.1 12,526.2 13,457.0 11,559.7 671.8 582.3 12,935.8 13,122.9 13,889.0

Industrial Raw Materials, Infrastructure

and Logistics 1,151.1 1,080.4 2,486.9 2,164.9 84.5 94.1 1,494.6 1,571.7 1,933.8

Commodity Financial Services (CFS) N.A. N.A. - - 15.2 (0.4) 96.5 117.6 173.7

Non-Food Category 1,151.1 1,080.4 2,486.9 2,164.9 99.7 93.7 1,591.1 1,689.3 2,107.5

Total 19,100.2 13,606.6 15,943.9 13,724.6 771.5 676.0 14,526.9 14,812.2 15,996.5

Sales Volume ('000 MT) Revenue EBITDA Invested Capital (IC)

Notes: IC excludes: (a) Gabon Fertiliser Project (30-Jun-19: S$243.4 million, 31-Dec-18: S$245.4 million, 30-Jun-18: S$248.1 million), and (b) Long Term Investment (30-Jun-19: S$123.8 million, 31-Dec-18: S$135.8 million, 30-Jun-18: S$214.1 million)


16

Edible Nuts and Spices4

332

438

340

237256

0

50

100

150

200

250

300

350

400

450

500

2016 2017 2018 H1 2018 H1 2019

EBITDAS$ million

2,222 1,996 1,944 1,8102,187

1,421 1,608 1,6662,280

1,941

3,643 3,604 3,610

4,091 4,128

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Dec'16 Dec'17 Dec'18 Jun'18 Jun'19

Invested Capital

Fixed Capital Working Capital

The Edible Nuts and Spices segment had a 2.1% growth in sales volumes mainly from Edible

Nuts in H1 2019 while its revenues dipped 1.0% in H1 2019 on lower peanut prices.

EBITDA rose 8.0% on improved contribution from Cashew, Almonds, Hazelnuts and Spices

businesses, which included a positive impact from the adoption of SFRS(I) 16. The Peanut

business recorded a lower EBITDA during the first-half with the cessation of peanut farming and

shelling operations in Argentina as well as lower shelling volumes in the US and reduced

margins amid an oversupplied market.

Invested capital in the segment increased by S$37.4 million compared with June 30, 2018.

Fixed capital increased on account of the adoption of SFRS(I) 16 with the addition of right-of-

use assets to the segment. This was partly offset by a reduction in working capital due to lower

inventory, particularly across the Spices and Almonds businesses.

4 Renamed from Edible Nuts, Spices and Vegetable Ingredients; Spices and Vegetable Ingredients has

been renamed Spices.


17

Confectionery and Beverage Ingredients

407

328

444

178

240

0

50

100

150

200

250

300

350

400

450

500

2016 2017 2018 H1 2018 H1 2019

EBITDA

1,541 1,528 1,501 1,533 1,649

4,5693,819 3,434 3,230 2,767

6,110

5,3474,935 4,763

4,416

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000


Invested Capital


Sales volume in the Confectionery and Beverage Ingredients segment declined 7.1% on lower

volumes from Cocoa and Coffee.

The segment also recorded a reduction in revenues of 9.5% on lower coffee prices and reduced

volumes.

Notwithstanding lower volumes and revenues, EBITDA rose by a strong 34.7% during H1 2019.

The Cocoa business sustained its growth momentum with improved margins in both supply

chain and processing operations. Despite the continued downcycle in coffee, the business

performed better during this first-half compared to H1 2018. The results included the positive

impact from the adoption of SFRS(I) 16.

Invested capital in this segment was reduced by a further S$347.3 million from a year ago.

While fixed capital increased with the acquisition of BT Cocoa and the addition of right-of-use

assets on the adoption of SFRS(I) 16, working capital eased with lower coffee prices and

improved working capital management in both Cocoa and Coffee.


18

Food Staples and Packaged Foods

330

360

289

167 176

0

50

100

150

200

250

300

350

400

2016 2017 2018 H1 2018 H1 2019

EBITDA

3,0243,547 3,460 3,552 3,639

1,4981,131 1,118

1,484753

4,5224,678 4,578

5,035

4,392

0

1,000

2,000

3,000

4,000

5,000

6,000


Invested Capital


Food Staples and Packaged Foods segment recorded a strong volume and revenue growth of

50.6% and 38.0% respectively in H1 2019, primarily driven by the growth in Grains trading

volumes.

EBITDA grew by 5.2% mainly led by Grains, Dairy and Edible Oil supply chain businesses,

Packaged Foods and the positive impact from the adoption of SFRS(I) 16 from H1 2019. The

impact was partly offset by a reduction in contribution from Rice and Sugar businesses. The

Rice business had lower earnings on reduced merchandising volumes into Africa while the

Sugar business closed its trading desk in Q1 2019.

While the Dairy supply chain and upstream farming in Russia performed well, farming

operations in Uruguay continued to face headwinds on account of the drought and consequently

higher feed costs which were partially offset by higher milk prices. Edible Oils supply chain and

trading did well during H1 2019, compensating for the impact of the tropical cyclone on its

refinery in Mozambique and higher period costs in OPG.

Invested capital was reduced by S$643.3 million compared with June 30, 2018 mainly due to

the optimisation efforts in the deployment of working capital. While fixed capital increased with

continued investments in OPG during H1 2019, working capital was pared down by nearly half

following the closure of the Sugar trading desk and the availability of supplier credit for the bulk

commodities volumes.


19

Industrial Raw Materials, Infrastructure and Logistics5

135

197

176

9485

0

50

100

150

200

250

2016 2017 2018 H1 2018 H1 2019

EBITDA

1,008 1,055 1,061 1,030 1,147

1,213 1,050

511904

348

2,2212,105

1,572

1,934

1,495

0

500

1,000

1,500

2,000

2,500


Invested Capital


Sales volumes and revenues in the Industrial Raw Materials, Infrastructure and Logistics

segment rose 6.5% and 14.9% respectively in H1 2019 mainly on higher sales volumes from

Cotton and Rubber.

However, EBITDA declined 10.2% on lower contribution from Cotton and the closure of the

Rubber and Fertiliser trading desks, which offset growth from Wood Products in H1 2019.

Contribution from Rubber and GSEZ was consistent as compared with H1 2018.

Compared with June 30, 2018, invested capital decreased by S$439.2 million. Although fixed

capital rose with the investment in Cotontchad and the addition of right-of-use assets, working

capital was reduced significantly as a result of lower inventory levels and increased access to

supplier credit in the Cotton business.

Commodity Financial Services

Commodity Financial Services posted an EBITDA of S$15.2 million in H1 2019, a strong

rebound from a year ago (H1 2018: -S$0.4 million). This was mainly due to better performance

in the Quantitative Fund.

Compared with June 30, 2018, invested capital decreased by S$77.2 million with the closure of

the Fundamental Fund in Q1 2019.

5 Renamed from Industrial Raw Materials, Ag Logistics and Infrastructure


20

Annexure

SGXNET Financial Statements and MD&A Reconciliation

The table below summarises the differences between the financial statements on SGXNET and

MD&A due to adjustments for exceptional items.

S$ million H1 2019 H1 2018 Q2 2019 Q2 2018

Other Income^ 20.3 12.7 10.4 5.6

Other Income 20.9 38.5 10.4 8.5

Less: Exceptional items 0.6 25.8 - 2.9

Overhead expenses^ (668.0) (640.6) (342.3) (333.8)

Other operating expenses^ (63.9) (144.3) (2.9) (142.5)

Other expenses (750.2) (809.1) (350.7) (476.5)

Less: Exceptional items (18.3) (24.2) (5.5) (0.2)

Taxation^ (31.7) (47.1) (10.8) (17.1)

Income tax expense (31.7) (50.8) (10.8) (17.2)

Less: Exceptional items - (3.7) - (0.1) ^ as stated in MD&A

Business Model and Strategy

Olam’s business is built on a strong foundation as a fully integrated supply chain manager and

processor of agricultural products and food ingredients, with operations across 16 businesses in

over 60 countries. As a supply chain manager, Olam is engaged in the sourcing of a wide

range of agricultural commodities from the producing countries and the processing,

warehousing, transporting, shipping, distributing and marketing of these products right up to the

factory gate of our customers in the destination markets. We also manage risk at each stage of

the supply chain. From our inception in 1989, we have evolved from a single country, single

product trader to a multi-country, multi-product supply chain manager.

In that process of evolution and development, the Olam business model had grown both in

depth as well as breadth, pursuing selected value chain adjacencies which both complement

and enhance our core supply chain model. We have developed new competencies as we

pursued our strategic goals, including the capabilities to identify, execute and integrate attractive

acquisition opportunities in selected countries. These initiatives are carefully selected to be

within or adjacent to our core value chain activities. Successfully completed transactions have

addressed opportunities in the upstream (plantation and farming), midstream (manufacturing/

processing) and downstream parts of the value chain.


21

Building on existing and new capabilities, we have expanded upstream selectively into

plantation ownership and management (perennial crops), farming (annual crops), Dairy farming

and forest concessions management. These opportunities, both organic and inorganic, have

been pursued in countries that have a comparative advantage to produce these commodities

relatively better and at relatively lower costs on a sustainable basis.

Selective investments across the value chain

Pursuit of this strategy has led us to invest selectively in almond orchards in Australia and US,

pistachio and walnut orchards in the US, pepper plantations in Vietnam and Brazil, Coffee

plantations in Laos, Tanzania, Zambia and Brazil, Cocoa plantation in Indonesia, Rice farming

in Nigeria, Palm and Rubber plantations in Gabon, Dairy farming in Uruguay and Russia, and

the development of tropical hard wood forest concessions in the Republic of Congo (ROC).

Similarly, in the midstream part of the value chain, we have pursued initiatives in value-added

processing and manufacturing activities, such as peanut shelling in the US, mechanical

processing of cashews in Côte d’Ivoire, hazelnut processing in Turkey and Georgia, spice

grinding in Vietnam, soluble Coffee manufacturing in Vietnam and Spain, Cocoa processing in

Côte d’Ivoire, Germany, Netherlands, Indonesia, Singapore, Ghana and Nigeria, and wheat

milling in Nigeria, Ghana, Senegal and Cameroon.

Downstream progress has been reflected in the initiatives completed in Packaged Foods

distribution in West Africa and the successful development of our own consumer brands in the

food category, which capitalise on our intimate knowledge of African markets, operations,

brands, and consumers. This downstream activity also builds on capabilities in the management

of food supply chains and on the common distribution pipeline that we have built for related

commodity products (including Rice, wheat and Dairy) in West Africa.

In addition, Olam has diversified into other related businesses which build on its latent assets

and capabilities developed over the last 29 years – the Commodity Financial Services business

(CFS) and the development of infrastructure and logistics in Africa.

Evolution of Olam’s Business Model: Olam 2.0

Olam now has an extensive upstream farming and plantation footprint and our midstream

manufacturing footprint has grown 10-fold since we began on the journey to integrate our value

chain participation into upstream and midstream expansion. We are recognised as being

leaders in sustainability, and our farmer/supplier and customer networks/engagement have

given us a global edge in many of our products. All these initiatives and changes combined had

resulted in Olam 1.0 – The Olam Way that forms the basis for the way we lead, organise,

compete, grow and succeed in the marketplace – evolving into Olam 2.0.


22

We have identified six key priorities in Olam 2.0 that will help us stay ahead and make Olam

future ready:

1. Focus on drivers of long-term value;

2. Put sustainability at the heart of our business;

3. Build operational excellence as a core competency;

4. Lead industry’s digital disruption and transformation;

5. Enhance our culture, values and spirit;

6. Realign and renew our organisation to execute our strategy.

2019-2024 Strategic Plan

The 2019-2024 Strategic Plan aims to capitalise on key trends shaping the sector. Driven by

consumers and advances in technology, these trends include increasing demand for healthier

foods, traceable and sustainable sourcing, e-commerce and the rise of “purpose” brands. This

new strategy builds on the current business model which has yielded strong results and growth

across Olam’s diversified portfolio. It sets out four pathways for growth:

1. Strengthen, streamline and focus the business portfolio with a planned investment of

US$3.5 billion (including US$1 billion maintenance capex) in 12 prioritised high potential

growth businesses6 and releasing US$1.6 billion from de-prioritising and divesting four

businesses – Sugar, Rubber, Wood Products, Fertiliser – and other assets that no longer

fit with Olam’s strategic priorities. The divestments will be completed in a responsible and

orderly manner during this plan period.

2. Drive margin improvement by enhancing cost and capital efficiency.

3. Generate additional revenue streams by offering differentiated products/services such as

AtSource, risk management solutions, value-added services, ingredients and product

innovation; and from both existing and new channels such as co-manufacturing, the food

service sector and e-commerce for small and medium sized customers.

4. Explore partnerships and investments in new engines for growth by assessing

opportunities to deliver to the consumers and farmers of tomorrow.

Olam has identified four enablers to execute these strategic pathways:

6 Edible Nuts, Cocoa, Grains & Animal Feed, Coffee, Cotton, Spices, Edible Oils, Infrastructure and

Logistics, Dairy, Rice, Packaged Foods and Commodity Financial Services


23

1. Achieve operational excellence through tracking metrics that matter, digital dashboards

and performance scorecards, execution discipline and continuous improvement.

2. Continue to keep sustainability at the heart of the business and re-generate food and

farming landscapes while capitalising on changing consumer preferences (‘right-for-me’,

‘right-for-the-planet’, ‘right-for-the-producer’).

3. Lead the industry’s digital transformation and disruption by identifying, validating and

deploying initiatives to capture and create value.

4. Attract, retain and inspire top talent by embedding Olam’s Purpose and investing in

people development programmes.

Business Segmentation and Reporting

We organise Olam’s operations into five business segments and three value chain segments for

reporting purposes. The distribution of the 16 businesses across the business segments and

the activities across the value chain segments are given below:

5 Business Segments 16 Businesses7

Edible Nuts and Spices

(formerly Edible Nuts, Spices and Vegetable Ingredients)

1) Edible Nuts (cashew, peanuts, almonds, hazelnuts, pistachios,

walnuts, sesame, quinoa, chia seeds and beans)

2) Spices (formerly Spices and Vegetable Ingredients. These

include pepper, onion, garlic, capsicums and tomato)

Confectionery and Beverage

Ingredients

3) Cocoa

4) Coffee

Food Staples and Packaged

Foods

5) Rice

6) Sugar and Sweeteners

7) Grains and Animal Feed

8) Edible Oils

9) Dairy

10) Packaged Foods

Industrial Raw Materials,

Infrastructure and Logistics

(formerly Industrial Raw

Materials, Ag Logistics and

Infrastructure)

11) Cotton

12) Wood Products

13) Rubber

14) Fertiliser

15) Infrastructure and Logistics (including Gabon Special Economic

Zone or GSEZ)

Commodity Financial

Services (CFS)

16) Funds Management

7 Risk Management Solutions and Trade and Structured Finance, which were previously two separate

businesses under Commodity Financial Services, have been reclassified as embedded services for

the businesses. Market-making and volatility trading activities were discontinued in 2018.


24

3 Value Chain Segments Value Chain Activity

Upstream

Includes all activities relating to farming (annual row crops),

plantations (perennial tree crops), Dairy farming and forest

concessions

Supply Chain

Includes all activities connected with origination, sourcing, primary

processing, logistics, trading, marketing (including value-added

services) and risk management of agricultural products and the CFS

segment

Midstream & Downstream

Includes all activities relating to secondary processing, contract

manufacturing, branded distribution, private label activities and Ag

logistics and Infrastructure


25

Key Definitions

Sales Volume: Sale of goods in metric tonne (MT) equivalent. There are no associated volumes for CFS and Infrastructure and Logistics businesses. Revenue: Sale of goods and services Other Income: Includes sale of scrap materials, commissions and claims income and fair value gain on investments held for trading. Negative goodwill, gain on sale of assets and other non-recurring, exceptional items which are part of Other Income in the Profit & Loss statement on SGXNet are classified as Exceptional Items in the MD&A. Cost of Sales: Cost of goods sold, shipping and logistics, commissions and claims expenses and the net measurement of derivative assets Overhead (Selling, General & Administrative) Expenses: Employee benefit costs, manufacturing overheads, travel expenses and other direct expenses Other Operating Expenses: Unrealised foreign exchange gain/loss and other expenses Net changes in fair value of biological assets: Records changes in the fair value of agricultural produce growing on bearer plants and livestock Exceptional Items: One-off, non-recurring items, including negative goodwill and related transaction costs, gain/loss on sale of assets/business, gain/loss on buyback of bonds, impairment loss, finance charges on pre-payment of loans and non-recurring business restructuring expenses. Tax expenses associated with these items are also presented as Exceptional Items. EBITDA: Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) which includes minority interest and excludes Exceptional Items PATMI: Net Profit After Tax (PAT) less minority interest Operational PATMI: PATMI excluding Exceptional Items Total Assets: Total assets are net of trade payables and accruals, derivative financial instruments (current liabilities), provision for taxation, other current liabilities and deferred tax liabilities. Invested Capital (IC): Excludes cash and bank balances, deferred tax assets, fixed deposits, other current/non-current assets (other than option premiums payable/receivable) and fair value of derivative assets on bonds EBITDA/IC: EBITDA on average invested capital based on beginning and end-of-period invested capital Net Gearing: Ratio of Net Debt (gross debt less cash) to Equity (before fair value adjustment reserves) Net Gearing (adjusted): Net gearing adjusted for readily marketable inventories that are liquid, hedged and/or sold forward, operating as near-cash assets on the balance sheet, and secured receivables are supported by letters of credit or documents through banks Free Cash Flow to Firm (FCFF): Operating cash flow less changes in working capital, cash taxes, capital expenditures and investments Free Cash Flow to Equity (FCFE): FCFF less net interest paid Note: Due to rounding, numbers presented throughout this document may not add up precisely to the totals provided and percentages may not precisely reflect the absolute figures.

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